Impact of enterprise digital transformation on capacity utilization: Evidence from China

Based on empirical analysis of Chinese listed companies from 2010 to 2018, we demonstrate that enterprise digital transformation has a significant impact on improving capacity utilization. Digital transformation is a significant driving force behind enterprise-specific production and innovation. Furthermore, enterprise innovation and enterprise-specialized production play a mediating role in the impact of enterprise digital transformation on capacity utilization. Based on these baseline findings, heterogenous analysis reveals that the impact of digital transformation on capacity utilization is significant for firms with larger capital scales or poor governance and manufacturing abilities. However, it is less important for enterprises with small- and medium-sized capital scales or with more standardized governance, as well as non-manufacturing (service) enterprises.


Reviewer 1＃
1-There are a huge number of published studies available in the field. How this study significantly contributes to the literature? The author's answer: The reviewer makes a valid point that there are numerous articles on digital transformation and a relatively large number of articles studying capacity, but almost no articles examining the effect of digital transformation on capacity utilization. Therefore, this study opens up a contemporary research perspective on digital transformation. Moreover, most of the studies on digital transformation have been conducted from a positive perspective to investigate its impact mechanisms. Based on this, the research presented in this paper adds a study on the negative effects of digital transformation to fill the gap in research thinking. In addition, current measurements and characterization of capacity utilization are usually based on a macro level, e.g., country, region, etc., whereas the calculations of capacity utilization in this paper are at a more microscopic level, which leads to more accurate conclusions. (See I. Introduction in the revised manuscript for details) 2-Please cite papers from the different areas, as the author mainly focuses on Chinese literature such as "China has made significant achievements in economic growth". While many countries, such as India, the USA, and Israel, are adopting digital transformation. The author's answer: The reviewer's comments are professional. With the development of science and technology, digital transformation is advocated in many countries, and there are many geographically distributed companies actively implementing digital management and services. However, there are some fundamental differences between these countries and regions and Chinese companies, such as over-building, over-investment, which hindered the efficient use of their resources and even prevents healthy economic development, and low capacity utilization and overcapacity. On top of this, the Chinese government urgently needs to find a tool to reverse this passive situation, so the digital transformation of local companies is particularly important. For these reasons, it is a more appropriate choice to study the impact of digital transformation on capacity ratios by analyzing the mechanism of its effect using data from Chinese-listed companies.
3-Expand the introduction by supporting the difference between digital and conventional transformation and cite some high-quality papers to support the idea. The author's answer: Your advice is perfectly professional. Based on your comments, I have added a high-level article related to the topic in the Introduction section as appropriate, as well as a more in-depth analysis and categorization of the current research on digital transformation. I have identified the current research gap in the analysis of the role of digitalization mechanisms and explored them as a research focus.
4-Scientific literature is lacking, please include more references related to the study. The author's answer: Thank you for your corrections. It has been added.
5-There are many characteristics of the overcapacity industry, but I can see only three have been mentioned in section II. The author's answer: Thank you for the correction. Excess capacity may exist at different stages of industry development. However, the causes of overcapacity are very different. For example, overcapacity is caused by competition in the early stages of industry development, or overcapacity is caused by declining market demand in sunset industries. Since this is not the focus of this paper, I have not highlighted it in the paper after further consideration.
6-Section II, First Paragraph, what do the distinctive Chinese characteristic please specify, and explain how these characteristics result in overcapacity. The author's answer: Thank you for the reminder, and based on your suggestion, I have added an introduction to Chinese firm features in the first section. The term capacity utilization, which serves as the focal explanatory variable in this study, has not been prominent in other country studies. This may be related to the historical process of overcapacity formation. It is well known that the most direct cause affecting capacity utilization is over-investment, and there are many causes that induce over-investment. In compiling the literature, I found that the main factors contributing to overcapacity in academia are broadly divided into three categories: 1. Industry competition, excessive competition in the industry, competitive strategies adopted by enterprises to deter and threaten their competitors, which triggers the expansion of production capacity and induces overcapacity; 2. Development dynamics, the frequent occurrence of investment surges in developing countries, and the role of market interest rates and price adjustment mechanisms are emphasized in the theory. The theory is that in developing countries, a large influx of capital into certain industries, i.e., an "investment boom", triggers the phenomenon of increasing overcapacity; 3. Government-business relationship, the most commonly studied theory in China, argues that local officials want to provide land and financing investments to local enterprises in the promotion race, resulting in the over-expansion of capacity and causing under-utilization of capacity.
7-Section II first paragraph, "The 2022 Government work report" cite the reference. The author's answer: Sorry for this error due to my negligence. Thank you for pointing it out, it has been corrected. 8-Please include the references to support your result and conclusion. Interpretation needs to be simplified and discussed with references. The author's answer: Thank you so much for your suggestion. I have made changes.
2.Many of the discussions and conclusions in this paper are neither supported by theoretical literature nor supported by theoretical model analysis, which greatly affects the credibility of this paper, e.g. the paper concludes that "digital transformation of enterprise will promote innovation, improve resource allocation and production capacity, so as to effectively curb overcapacity". How to curb overcapacity through digital transformation is an interesting question, but there is no model or theoretical analysis in this paper, so the mechanism is not well explored. As a result,many conclusions are just like basic judgments. I suggest the authors write a model to explain how digital transformation can better curb overcapacity compared with other ways. The author's answer: The reviewer makes very good points and your suggestions are very professional. The logic and theory of the article have been further refined and reconstructed with your suggestions. In the introduction section, I appropriately introduce the many high-quality works in the literature to sort out the objective factors the influence capacity utilization at a more specific level, as well as to point out the reasons for selecting Chinese-listed companies as the target of the study. In addition, in sorting out the impact and mechanism of action of current enterprise capacity utilization, I discovered its research gap -on capacity utilization, which provides ideas for further analysis and paves the way for the theoretical analysis and research hypothesis in the later sections. In the theoretical analysis sections, I adopt the previous analysis framework and introduce the main assumptions of this paper based on reading a large amount of highlevel literature. The theoretical analysis is taken from the classical literature, which enhances the credibility of the article. In the analysis of the impact of the digital transformation of firms on capacity utilization, two mediating variables, firm innovation, and specialized production, are introduced in this paper. Among them, for the hypothesis that digital transformation drives enterprise innovation, I explore in more depth the specific paths and implementation capabilities of innovation affecting enterprise capacity by specifically analyzing the factors that affect the role of capacity utilization and enumerating the mechanisms of impact of digital transformation. I think this can clearly show the mechanism of enterprise innovation as a mechanism. In the analysis of the specialization and division of labor and the innovative and important intermediary of specialized production of enterprises, I have explored it from the perspective of enterprise expansion and development. I am aware of the importance of clarifying the law of firm development for the study of this paper. Therefore, by reviewing the literature, I found that the horizontal expansion of enterprises inevitably promotes the efficient use of resources. Moreover, digital transformation can expand the production boundaries of enterprises and enhance specialized production capacity by reducing production costs and management costs. These factors can improve the efficiency of resource utilization, which in turn has a positive effect and impact on capacity utilization. Therefore, the specialized production segmentation of enterprises there are any other modifications we could make, we would like very much to modify them and we appreciate your help. We hope that our manuscript will be considered for publication in your journal. Thank you so much for your help.   transformation while overlooking its integration with existing production models and 154 strategic options may be counterproductive to improving capacity utilization due to 155 the following reasons. First, the integration of digital technology and industrial 156 systems is still in its early stages, and "exploratory innovation" as a source of new 157 technology is highly risky. Therefore, if digital transformation is over-promoted, it 158 will not only consume firms' existing production resources but will also create

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To ensure the study's quality, the sample was screened in the following ways:  its "boundary" using the measurement method. The production function method is 217 used in this study to calculate the capacity utilization rate of each industry and its 218 three main product segments. The following are the reasons for using this method. 219 First, the production function method is based on neoclassical growth theory, which is 220 not based on historical experience and has a strong theoretical foundation, good 221 validity, and reliability in measuring capacity utilization. Second, unlike the peak 222 method, the production function method incorporates the influence of technological 223 progress, capital, and labor on output, as well as the degree of contribution of each 224 production factor to output, which can reflect the changes in and characteristics of 225 economic structure and production activities. Third, the production function method 226 requires only data related to the three indicators of capital, labor, and output for 227 practical application, and the production function method has certain advantages over 228 the cost function method in terms of data availability. Finally, given that different 229 production links in each industry's industrial chain involve different subsectors, the 230 maximum production capacity that each production link can achieve varies. Therefore, 231 the production function approach can eliminate production capacity differences 232 between different enterprises in each production chain, making measurements 233 comparable and estimation results directly applicable to the existing capacity 234 assessment standards.

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The Cobb-Douglas (C-D) production function is used in this study to model the 236 production function in its basic form as follows: Extrapolating the production function to its "boundary," the boundary production 253 function is obtained as: where Yi,t * denotes the theoretical maximum level of output or potential output. Let 257 lnA = α and E(μ) = ε; substituting these variables in the above equation:  The higher the value of the DT indicator, the greater the degree of digitalization.      variables. Hypothesis H1 is tested using the following models: 393

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Descriptive analysis 398 As shown in Table 2, the mean and standard deviation of capacity utilization     Table 3 show that digital transformation has a 436 significantly greater effect on actual output than potential output, and that enterprise   Previous studies may have raised endogeneity concerns for the following two instrumental variable for the digitalization progress of enterprises in the current period.

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The results in column (1) of Table 4 show that the explanatory variable coefficients  Mechanism testing and analysis 515 The analyses thus far reveal that the mechanism of digital transformation to 516 promote enterprise capacity utilization is to promote enterprise innovation and 517 production specialization, which, in turn, increases the efficiency of enterprises' 518 resource utilization. Therefore, the degree of production specialization (VSI) and 519 technological innovation are included in the analysis and hypothesis H1 is proposed, 520 the regression results of which are shown in Table 5.   Columns (1) and (2)  Overcapacity has resulted in significant resource misallocation, and waste    Capacity utilization rate, also known as equipment utilization rate, is the ratio 107 of total industrial output to production equipment; that is, how much of the actual 108 6 production capacity is in use. When an enterprise's output is significantly lower than 109 its normal capacity or its product supply significantly exceeds the market demand, the 110 enterprise capacity is idled. Therefore, effective output optimization and a reduction 111 in the degree of resource mismatch are critical for alleviating overcapacity. production and innovation to increase capacity utilization; That is, specialization and 144 product innovation act as mediators in the influence path specialization is stronger in firms with low internal control costs, as well as firms in manufacturing and competitive industries. Furthermore, they discovered that digitalization increases total factor productivity by influencing firm boundaries, which has a positive impact on firm economic efficiency. Labor specialization increases productivity, drives technological innovation, and promotes firms' economic growth   which is commonly used as a measurement index to study the level of overcapacity..

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At present, among the existing capacity measurement methods, the peak method, cost 212 function method, production function method, and data envelopment analysis (DEA) 213 methods have beenare adopted by severalmany scholars. When scholars at home and 214 abroad study the level of overcapacity, they usually use the capacity utilization rate 215 (the ratio of actual output to capacity output) as athe measurement index.

11
The production function method is a metricmeasure obtained based on the definition 217 of technical capacity. Technical capacity isrefers to the level of capacity at which all 218 the capital stock, labor, land, and other factors of production invested in industrial 219 production can be fully utilized for maximum output, assumingprovided that 220 preferences and technologies are identified. In the actual application of the production 221 function method for capacity measurement, theThe annual series of capacity data is 222 estimated in the actual application of the production function method for capacity 223 measurement by setting the production function and extrapolating the annual series of 224 actual output to its ""boundary"" using the measurement method. TheIn this 225 studypaper, the production function method is wais used in this study to calculate 226 measure the capacity utilization rate of each industry and its three main product 227 segments. The following are the reasons for using adopting this method are as follows. production capacity that each production link can achieve varies. Therefore, the 243 production function approach can eliminate production capacitythe differences 244 betweenin production capacity among different enterprises in each production chain, 245 making the measurements comparable and also making the estimation results directly 246 applicable to the existing capacity assessment standards.

247
In this studypaper, theThe Cobb-Douglas (C-D) production function is used in 248 this study to model the production function in its basic form as follows:      Extrapolating the production function to its ""boundary,""", we obtain the boundary 267 production function is obtained as: where Yi,t * denotes the theoretical maximum level of output orand, potential output.

271
Let lnA = α and E(μ) = ε;, substituting these variables into the above equation: Thus, the boundary production function deduced from the estimation is:

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Capacity utilization is measured as:

392
ManyIn reality, many factors contributelead to firm overcapacity in the firm. In 393 addition to the digital transformation of firms, which is the focus of this study, 394 characteristics such as firm size (size), gearing (lev), return on total assets (roa), andas 395 well as geographical and industry characteristics, such as the nature of firms (soe), 396 can have an impact onaffect athe firm's capacity utilization. Therefore, this study 397 controls for thes above variables weare controlled for in this studypaper. Furthermore, 398 codeIn addition, code, industry, province, and year denote firm, industry, region, and           year fixed effects, respectively. Table 1  Evaluating the impact of digital transformation (inverted "U" mechanism), production 423 specialization, enterprise innovation, and capacity utilization are evaluated using, Gearing ratio lev (Total liabilities at the end of period / total assets) × 100% Total return on assets roa (Total profit --(income tax rate × total profit)) / (average total liabilities + average owner's equity) × 100% Nature of business property soe If the company is a state-owned enterprise, ， the value is 1; ；otherwise, it is 0

Formatted
...    Table 3 presents the reports the results of the benchmark regression resultss, 500 where the first column controls only for fixed effects and the second column 501 includesadds firm-and region-level control variables. The results show that the DT 502 coefficients on DT are all significantly positive at the level of less than 1%, implying 503 that the greaterhigher the degree of digitalization, the higher theits capacity utilization.

504
In terms of economic significance, the results in the second column, for example, 505 show that a 1%one percent increase in a firm'sthe degree of digital transformation 506 increases of a firm will increase its capacity utilization by 31.5%. This suggests that, 507 both economically and statistically, digital transformation has does have a significant 508 incentive effect on enterprise capacity utilization, both in an economic and 509 statistical sense, and hypothesis H1 is supported by these empirical results. As stated 510 mentioned in the previous theoretical analysis, firm capacity utilization is determined 511 by the difference of firms depends on the gap between actual output and its potential       Internet broadband access subscribers, has a significantwhose coefficient is significant at the 1% level, indicating that the direction and significance of the regression 594 coefficients remain the same as previously stated, thereby evidencing the robustness 595 of the primary findings above, that isi.e., they pass the robustness test.  ThePrevious analyses thus far reveal show that the mechanism of digital 620 transformation to promote enterprise capacity utilization is to promote enterprise 621 innovation and production specialization, which, in turn, increases the efficiency of 622 enterprises' raw resource utilization. Therefore, this studypaper introduces the degree  Table 5.   Dear reviewers, Thank you so much for your comments and professional advice. These comments helped to improve the academics of my article. Following your suggestions and requests, we have made corrections to the revised manuscript. At the same time, the grammar of the manuscript has been reviewed and edited. I hope our work can be improved again. Moreover, we would like to show the details as follows:

Reviewer 1＃
1-There are a huge number of published studies available in the field. How this study significantly contributes to the literature?
The author's answer: The reviewer makes a valid point that there are numerous articles on digital transformation and a relatively large number of articles studying capacity, but almost no articles examining the effect of digital transformation on capacity utilization. Therefore, this study opens up a contemporary research perspective on digital transformation. Moreover, most of the studies on digital transformation have been conducted from a positive perspective to investigate its impact mechanisms. Based on this, the research presented in this paper adds a study on the negative effects of digital transformation to fill the gap in research thinking. In addition, current measurements and characterization of capacity utilization are usually based on a macro level, e.g., country, region, etc., whereas the calculations of capacity utilization in this paper are at a more microscopic level, which leads to more accurate conclusions. (See I. Introduction in the revised manuscript for details) 2-Please cite papers from the different areas, as the author mainly focuses on Chinese literature such as "China has made significant achievements in economic growth". While many countries, such as India, the USA, and Israel, are adopting digital transformation. The author's answer: The reviewer's comments are professional. With the development of science and technology, digital transformation is advocated in many countries, and there are many geographically distributed companies actively implementing digital management and services. However, there are some fundamental differences between these countries and regions and Chinese companies, such as over-building, over-investment, which hindered the efficient use of their resources and even prevents healthy economic development, and low capacity utilization and over-capacity. On top of this, the Chinese government urgently needs to find a tool to reverse this passive situation, so the digital transformation of local companies is particularly important. For these reasons, it is a more appropriate choice to study the impact of digital transformation on capacity ratios by analyzing the mechanism of its effect using data from Chinese-listed companies.
3-Expand the introduction by supporting the difference between digital and conventional transformation and cite some high-quality papers to support the idea. The author's answer: Your advice is perfectly professional. Based on your comments, I have Response to Reviewers added a high-level article related to the topic in the Introduction section as appropriate, as well as a more in-depth analysis and categorization of the current research on digital transformation. I have identified the current research gap in the analysis of the role of digitalization mechanisms and explored them as a research focus. 4-Scientific literature is lacking, please include more references related to the study. The author's answer: Thank you for your corrections. It has been added.
5-There are many characteristics of the overcapacity industry, but I can see only three have been mentioned in section II. The author's answer: Thank you for the correction. Excess capacity may exist at different stages of industry development. However, the causes of overcapacity are very different. For example, overcapacity is caused by competition in the early stages of industry development, or overcapacity is caused by declining market demand in sunset industries. Since this is not the focus of this paper, I have not highlighted it in the paper after further consideration.
6-Section II, First Paragraph, what do the distinctive Chinese characteristic please specify, and explain how these characteristics result in overcapacity. The author's answer: Thank you for the reminder, and based on your suggestion, I have added an introduction to Chinese firm features in the first section. The term capacity utilization, which serves as the focal explanatory variable in this study, has not been prominent in other country studies. This may be related to the historical process of overcapacity formation. It is well known that the most direct cause affecting capacity utilization is over-investment, and there are many causes that induce over-investment. In compiling the literature, I found that the main factors contributing to overcapacity in academia are broadly divided into three categories: 1. Industry competition, excessive competition in the industry, competitive strategies adopted by enterprises to deter and threaten their competitors, which triggers the expansion of production capacity and induces overcapacity; 2. Development dynamics, the frequent occurrence of investment surges in developing countries, and the role of market interest rates and price adjustment mechanisms are emphasized in the theory. The theory is that in developing countries, a large influx of capital into certain industries, i.e., an "investment boom", triggers the phenomenon of increasing overcapacity; 3. Government-business relationship, the most commonly studied theory in China, argues that local officials want to provide land and financing investments to local enterprises in the promotion race, resulting in the over-expansion of capacity and causing under-utilization of capacity. 7-Section II first paragraph, "The 2022 Government work report" cite the reference. The author's answer: Sorry for this error due to my negligence. Thank you for pointing it out, it has been corrected.
8-Please include the references to support your result and conclusion. Interpretation needs to be simplified and discussed with references. The author's answer: Thank you so much for your suggestion. I have made changes. 9-Include the limitation of the study. The author's answer: In light of your comments and suggestions, we have added the limitations of the study in the "1 Introduction" section.
10-There are many typing and grammatical errors, which needs to be corrected. The author's answer: Thank you for your advice. The grammatical problems have been corrected one by one.

Reviewer 2＃
Main comments 1. The English writing of this article is not up to standard, there are many grammatical errors, and the expression is not authentic, which is far from meeting the requirements of publication. There are unnecessary long difficult sentences in the article, and too many "and" are inappropriately used. I suggest the author(s) carefully revise the paper and submit it to a Chinese journal; otherwise the language should be greatly improved.
The author's answer: Thank you for your criticism. I re-read the article carefully and revised it, and have made sufficient repairs to eliminate grammatical errors, correct the use of "and", and make changes to the long and difficult sentences.
2. Many of the discussions and conclusions in this paper are neither supported by theoretical literature nor supported by theoretical model analysis, which greatly affects the credibility of this paper, e.g. the paper concludes that "digital transformation of enterprise will promote innovation, improve resource allocation and production capacity, so as to effectively curb overcapacity". How to curb overcapacity through digital transformation is an interesting question, but there is no model or theoretical analysis in this paper, so the mechanism is not well explored. As a result,many conclusions are just like basic judgments. I suggest the authors write a model to explain how digital transformation can better curb overcapacity compared with other ways.
The author's answer: The reviewer makes very good points and your suggestions are very professional. The logic and theory of the article have been further refined and reconstructed with your suggestions. In the introduction section, I appropriately introduce the many high-quality works in the literature to sort out the objective factors the influence capacity utilization at a more specific level, as well as to point out the reasons for selecting Chinese-listed companies as the target of the study. In addition, in sorting out the impact and mechanism of action of current enterprise capacity utilization, I discovered its research gap -on capacity utilization, which provides ideas for further analysis and paves the way for the theoretical analysis and research hypothesis in the later sections.
In the theoretical analysis sections, I adopt the previous analysis framework and introduce the main assumptions of this paper based on reading a large amount of high-level